CORPORATE FINANCE CUSTOM W/CONNECT >BI
11th Edition
ISBN: 9781307036633
Author: Ross
Publisher: MCG/CREATE
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Chapter 16, Problem 27QP
Summary Introduction
To substitute: The given
Introduction:
Cost of equity:
It is a return that a company pays to its equity investors. A company’s equity cost signifies the compensation the market demands in substitute for owning the possessions and bearing the ownership risks.
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1. Determine the weighted average cost of capital (WACC) for Vigour Pharmaceuticals.
Kindly use the following Formulae:
WACC: (E/ V) x R e + ( D/ V) x R d x (1-Tc)
whereas:
E is for Equity ( market value of firm's equity)
D is for Debt ( market value of firm's dept)
V is for Value ( combine market value which is D + E)
R e is the cost of equity
R d is the cost of debt
Tc is the corporate tax rate
The cost of equity is ________.
Group of answer choices
A. the interest associated with debt
B. the rate of return required by investors to incentivize them to invest in a company
C. the weighted average cost of capital
D. equal to the amount of asset turnover
Factors that affect the cost of capital equation
Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of the following factors are outside a firm’s control? Check all that apply.
The general level of stock prices
The effect of the tax rate on the cost of debt in the weighted average cost of capital equation
The firm’s capital structure
The impact of a firm’s cost of capital on managerial decisions
Consider the following case:
Acme Manufacturing Corporation has two divisions, L and H. Division L is the company’s low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company’s high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division L is…
Chapter 16 Solutions
CORPORATE FINANCE CUSTOM W/CONNECT >BI
Ch. 16 - MM Assumptions List the three assumptions that lie...Ch. 16 - Prob. 2CQCh. 16 - Prob. 3CQCh. 16 - MM Propositions What is the quirk in the tax code...Ch. 16 - Prob. 5CQCh. 16 - Prob. 6CQCh. 16 - Optimal Capital Structure Is there an easily...Ch. 16 - Financial Leverage Why is the use of debt...Ch. 16 - Homemade Leverage What is homemade leverage?Ch. 16 - Capital Structure Goal What is the basic goal of...
Ch. 16 - Prob. 1QPCh. 16 - EBIT, Taxes, and Leverage Repeat p arts (a) and...Ch. 16 - ROE and Leverage Suppose the company in Problem 1...Ch. 16 - Break-Even EBIT Franklin Corporation is comparing...Ch. 16 - Prob. 5QPCh. 16 - Break-Even EBIT and Leverage Kolby Corp. is...Ch. 16 - Leverage and Stock Value Ignoring taxes in Problem...Ch. 16 - Homemade Leverage Star, Inc., a prominent consumer...Ch. 16 - Homemade Leverage and WACC ABC Co. and XYZ Co. are...Ch. 16 - MM Scarlett Corp. uses no debt. The weighted...Ch. 16 - Prob. 11QPCh. 16 - Calculating WACC Weston Industries has a...Ch. 16 - Prob. 13QPCh. 16 - MM and Taxes Bruce Co. expects its EBIT to be...Ch. 16 - MM and Taxes In Problem 14, what is the cost of...Ch. 16 - MM Proposition I Levered, Inc., and Unlevered,...Ch. 16 - MM Tool Manufacturing bas an expected EBIT of...Ch. 16 - Firm Value Cavo Corporation expects an EBIT of...Ch. 16 - MM Proposition I with Taxes The Dart Company is...Ch. 16 - MM Proposition I without Taxes Alpha Corporation...Ch. 16 - Cost of Capital Acetate, Inc., has equity with a...Ch. 16 - Homemade Leverage The Veblen Company and the...Ch. 16 - MM Propositions Locomotive Corporation is planning...Ch. 16 - Stock Value and Leverage Green Manufacturing,...Ch. 16 - Prob. 25QPCh. 16 - Prob. 26QPCh. 16 - Prob. 27QPCh. 16 - Prob. 28QPCh. 16 - Prob. 29QPCh. 16 - Prob. 30QPCh. 16 - STEPHENSON REAL ESTATE RECAPITALIZATION Stephenson...Ch. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - Prob. 4MCCh. 16 - Prob. 5MC
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- Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. a) The higher the proportion of equity in a company’s overall capital structure, thehigher return required by its debtholders. (Explain your reasoning – provide a numerical example supporting your answer.) b) In the presence of corporate taxes, a company would prefer to raise debt onlywhen the benefits of the tax shield fully offset the cost of debt. (Explain yourreasoning – provide a numerical example supporting youranswer.) c) In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain yourreasoning –, provide a numerical example supporting youranswer.)arrow_forward1. From the scenario, Identify what is the Market value of the firm's equity, the market value of the firm's debt, the cost of equity (required rate of return), cost of debt (yield to maturity on existing debt) and the corporate tax rate.arrow_forward(a) – Explain the concept of Tax Deduction in WACC. Does this tax deduction make debt finance Cheaper Then Equity Finance? (b) – Compare Dividend Valuation Model with Capital Asset Pricing Model in the context of calculating cost of equity? Can use of these two methods result in differing values of business?arrow_forward
- 1. Determine the weighted average cost of capital (WACC) for Vigour Pharmaceuticals. use the following Formulae: WACC: (E/ V) x R e + ( D/ V) x R d x (1-Tc) whereas: E is for Equity ( market value of firm's equity) D is for Debt ( market value of firm's dept) V is for Value ( combine market value which is D + E) R e is the cost of equity R d is the cost of debt Tc is the corporate tax ratearrow_forwardAccording to the simplified Brennan Lally CAPM, what is the cost of equity for A Ltd? Using the cost of debt, cost of equity, market value of debt and market value of equity given in the table given, what is the weighted average cost of capital (WACC) for B Ltd? Thank you!arrow_forwarda) Determine the market value proportions of debt, preference shares and ordinary equity comprising the company’s capital structure. b) Calculate the after-tax costs of capital for each source of finance and the after-tax weighted average cost of capital for the company. C) Provide recommendation to your client. d) What are the assumptions underlying the use of a dividend growth model for the estimation of a company’s cost of equity?arrow_forward
- Everything else remaining the same, the cheapest source in the calculation of WACC is: A) after tax cost of debt B) preferred stock C) cost of external equity D) cost of internal equityarrow_forwarda) Calculate Germina's cost of equity b) Calculate Germina's after-tax cost of debt c) Calculate Germina's cost of preferred shares d) Calculate Germina's Weighted Average Cost of Capitalarrow_forwardHow would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratioarrow_forward
- which one is correct please confirm? QUESTION 37 Which of the following statements is true concerning companies that do not pay dividends? a. The cost of equity capital can be estimated using the Capital Asset Pricing Model. b. The cost of equity capital is equal to the growth short-term rate of earnings per share. c. The dividend capitalization model can be used to determine an accurate cost of equity capital. d. None of these are correctarrow_forwardQUESTION Generally speaking, the cost of debt is cheaper than the cost of equity. Does it imply that a firm should increase its debt-to-equity ratio to as high as possible such that its corporate cost of capital can be minimized?arrow_forwardPlease answer the following follow up questions Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. d) The higher the proportion of equity in a company’s overall capital structure, thehigher return required by its debtholders. (Explain your reasoning – in yourexplanation, provide a numerical example supporting your answer.) e) In the presence of corporate taxes, a company would prefer to raise debt onlywhen the benefits of the tax shield fully offset the cost of debt. (Explain yourreasoning – in your explanation, provide a numerical example supporting youranswer.) f) In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain yourreasoning – in your explanation, provide a numerical example supporting youranswer.)arrow_forward
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